Sappi expects seasonal slowdown in China to impact dissolving pulp prices

The pulp segment, in particular, showcased an impressive performance with profitability levels significantly exceeding those recorded in the previous year. Picture: Supplied

The pulp segment, in particular, showcased an impressive performance with profitability levels significantly exceeding those recorded in the previous year. Picture: Supplied

Published Feb 5, 2025

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Sappi has reported a robust first quarter performance for the period ending December 2024, despite anticipating short-term pressure on dissolving pulp pricing as China braces for the seasonal slowdown associated with the Lunar New Year celebrations.

The company’s adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) stood at $203 million (R3.8 billion)—significantly surpassing expectations and improving markedly from the previous year.

In an update on Wednesday, the leading global provider of materials derived from woodfibre-based renewable resources underscored that year-on-year profitability had improved across all segments, buoyed by strategic cost savings, enhanced operational efficiencies, and stronger sales volumes of dissolving pulp and packaging papers.

“Amid global macroeconomic headwinds, weak consumer spending, and overcapacity in paper markets, our Thrive strategy—especially our strategic capacity rationalisation and cost-saving initiatives—has yielded positive results,” the company said.

This strategic approach appears to be paying dividends as Sappi navigates challenges in the broader market.

The pulp segment, in particular, showcased an impressive performance with profitability levels significantly exceeding those recorded in the previous year.

While the demand for dissolving pulp remained solid, the company noted that the Chinese viscose staple fibre (VSF) market is entering its traditional slow period ahead of the Lunar New Year. Despite this seasonal slowdown, operating rates within the VSF industry have remained high, with inventories in the value chain sitting below historical averages.

On the pricing front, the hardwood dissolving pulp market experienced a $10 rise to $970 per ton by the end of the quarter. Sappi enjoyed a 10% year-on-year increase in dissolving pulp sales volumes; however, it was largely attributed to maintenance shuts experienced in the prior year that did not recur this quarter.

When examining the performance of other segments, Sappi reported an improvement in the profitability of the graphic papers segment, primarily attributed to operational efficiency measures.

Although sales volumes experienced a dip of 3% compared to the previous year, resilient selling prices managed to sustain healthy EBITDA margins despite an oversupplied market and diminished industry operating rates.

In contrast, the packaging and speciality papers segment also reflected year-on-year profit improvements, albeit starting from a low base.

A notable 14% increase in sales volumes was spurred by a strong recovery in North American paperboard sales, although recovery in Europe lagged, hampered by weak consumer sentiment and overcapacity issues.

In South Africa, the demand remained satisfactory within the context of the usual seasonal downturn in fruit export markets during the first quarter. Operational enhancements at the Ngodwana and Somerset Mills further bolstered profit improvements in this segment.

Adjusted earnings per share for the quarter reached 14 US cents, a strong increase from the 5 US cents recorded in the prior year, reflecting the overall improved operating performance. Special items did impact earnings, reducing them by $11m, primarily due to the final write-offs associated with last year's mill closures and fire-damaged timber.

Additionally, the forestry fair value price adjustments recorded a loss of $1m during the quarter.

Cratos Asset Management said, “The pulp segment performed well, with dissolving pulp sales up by 10%” and “graphic paper profitability improving despite a 3% drop” in sales.Although “net debt rose 16% year on year to $1.41 billion (R26bn), it was was down” on last quarter.

“The positives were offset by weak consumer demand especially Europe, capex costs and once-offs such as mill closures and fire damaged timber,” added Cratos. - Additional Tawanda Karombo

BUSINESS REPORT